Home > Uncategorized > FDI in Retail: What it means for reforms in Agriculture

FDI in Retail: What it means for reforms in Agriculture


“I sell gobhi [cauliflower] at Rs 5 and potato at Rs 1 per kg from my farm. If you guys want to pay what you pay, fight the FDI in retail,” tweeted Lieutenant-General (retd) H S Panag (@rwac48).

The BJP’s core support comes from the merchant class in small towns who dominate commerce in the town’s economic life. They own the wholesale trade, dealerships, large shops, and the odd factory or two that may be around to process agricultural produce. Historically, the merchant class survived Muslim and British rule intact. Both had no interest in destabilising the local trade as long as taxes or tribute were paid on time. Indeed the rulers were benign to them and did much to establish markets (mandis) and trading infrastructure in order to facilitate trade and commerce. While there were some selective favours to Muslim traders under the Mughals, by and large, the merchant class was not persecuted on religious grounds except under Aurangzeb for jazya (Islamic tax). Under the British rule, some created enough capital to transition into manufactures such as jute and cotton textiles, oil mills, etc. Thus while the merchant class survived alien rule rather well, it was also highly nationalistic and was keen to see the British vacate business lines in their favour. The merchant class’ right-wing nationalistic credentials are well grounded in our historical experience.

Independence saw the class prosper as much of the cheap British imports that held profits down were eliminated. Further, exports at depressed prices were also gradually phased out. For the merchant class therefore, independence came as a big boon. Sadly, independence was quickly followed by Nehru’s Fabian socialism that imposed a plethora of controls on trade and commerce, ranging from compulsory monopoly procurement to direct price setting and even food rationing. Much of this imposed onerous costs on trade and was seen as an unjustified imposition. The merchant class was always numerically small, though moneyed and powerful. So it took to the BJP as its protector against the ruling Congress party that was imposing the controls in the name of socialism. Hence, the BJP’s nexus with the merchant class has a valid historical reason grounded in economics. The BJP espoused their cause for liberalisation from controls. Hence, the party still carries the halo of a right-wing liberalising party. But is it right-wing and liberalising anymore?

Liberalisation by the Congress in the 1990s changed all the political equations, producing profound changes in the polity. Some of them have still not been recognised fully. With liberalisation, Congress became the party of economic reforms, although it remains home to some of the most ardent Marxists. Congress Marxists, exemplified by Sonia Gandhi and her National Advisory Council (NAC), still believe growth comes free on trees and all economics is about sharing out the goodies fairly and equitably. They have had the upper hand in UPA2. On the other hand, the need to trade, import oil, and the high level of indebtedness, both external and internal, mean that you have to create policies that generate sufficient growth to pay the bills and leave some over for distributive justice. India has some $ 100 billion in debt coming due in 2012. It is these constraints that drive economic reforms, not conviction. Now that agriculture growth has hit a wall, and inflation has surged, the constraints have an upper hand, thus bringing reformists to the fore. Foreign direct investment (FDI) in retail is a handy way of addressing agricultural reforms as well as stimulating FDI cash inflows. Hence the bugle for reforms is being trumpeted once again.

FDI in trade represents low-hanging fruit in the agricultural reform package. It is aimed at rationalising and streamlining the whole procurement, distribution and marketing chain for commodities, ranging from grains to vegetables. It includes warehousing, cold storage, agro-processing, standardisation of products and the like. Standards and seeding are two things whose impact on costs and price are profound but under-appreciated. The payoffs from investment in this area are so rich for the economy that a mere reduction in wastage estimated at 30 percent of total produce, is sufficient to pay for projected investment. If these investments have not been made it is because of the policy restrictions that are now being done away with. Why then is the BJP, as a party of reforms, opposed to the FDI and proposed reforms?

The merchant class had a harrowing time preserving their businesses under socialism. Ingenuity and pervasive corruption in the government helped mitigate some of the constraints. Over the years, the merchants created a near monopsony in agricultural procurement by restricting membership of the Agriculture Produce Marketing Committees (APMCs). FCI and others like the CCI that were supposed to compete with merchants were co-opted by subversion. Support price mechanisms provide some protection to farmers against excessive price manipulation but state intervention has other unintended consequences and is restricted to a few food staples and cash crops. Farmers prefer to grow what the state supports, leading to shortages in things like pulses, vegetables and poultry. Competition by the corporates in the agricultural markets and the backward linkages they create in farming (standard seeds, assured offtake, predetermined floor price, etc) will reduce the risk to the farmers of diversifying into multiple crops like vegetables and pulses. Since a major reason for the high food inflation is structural shortages in pulses, vegetables and the like, reforms have become imperative.

FDI in retail is a misnomer. Actually it is letting in the corporate sector into agriculture. Why should they be kept out? Let the big battle for business begin and may the best survive. How are they like the East India Company? And why should small merchants be protected against domestic competition? They are small but they are hardly poor. Then why is the FDI necessary? Two factors dictate that. The biggies too need competition and that the FDI can provide. The other is technical knowhow, best practices and branding. Some FDI investors may prefer majority control but most will opt for local tie-ups. So the FDI will bring technology and cash, including cash that otherwise may not return to India soon. There is this hugely false propaganda that kirana (retail) stores will suffer. Yes, there will be competitive pressure but they will compete, collaborate, complement. The effect will be initially more on the wholesale rather than retail shops. Mom & Pop stores who know their customers always survive. Merchant fears of competitive pressure are overblown.

More than the merchants, the BJP faces an existential crisis that cannot be wished away. India needs a strong Centre-Right party that champions reforms independently of the constraints that drive the Congress party to reforms. It needs to retain its merchant class base but is unable to protect its short-term interests. Who comes first? Its base or India? The fact is the BJP has not thought through and worked out its politics with a thorough understanding of what economic reforms entail. From being the party of reforms under socialism, it has become a party of the status quo, hunting with the communists and defending vested interests. Nor is the natural religious tilt of the BJP sufficient to cover its tattered reformist credentials. It needs to think hard and afresh whether it is the party that will lead India to reforms and liberalisation or march it backwards. If the latter, then it should not be surprised to see itself marching alone as the aspirational class desert it in droves.

If India does not have a party of economic reforms, then one must be invented. Reforms are too critical to be left to times when yawning fiscal deficits must be bridged after they have been allowed to balloon, funding ill thought out doles.


The writer is a trader. She can be reached at sonali.ranade@hotmail.com or @SonaliRanade on Twitter

Categories: Uncategorized
  1. December 5, 2011 at 1:50 pm

    While reforms are necessary and will bring economic growth, it is important to see how corporates function. The reduction of wastage and maximizing profit is not the only thing that happens. Streamlining means fewer people do more work, even if those few earn more. Extinction of inefficiency though out-performing. These middlemen are a substantial part of the population. They are citizens whose work will be chopped off like another industrial revolution. Unemployment means poverty and has been co-related with social conflicts, domestic abuse and increases in crimes.

    We have reserves. Only, using them will destroy the ruling party or what is left to destroy, hence this charade of reform, which happens to abdicate its own decades of irresponsibility in agriculture as well as financial bumbling in one shot.

    What does FDI mean for farmers who don’t jump on the wagon (or can’t), for whatever reason? How exactly will traders be expected to survive against resource rich corporations which lay entire systems at one go, when they have the reach to only play a role in part of them? Competition is among equals. This will be hunting season.

    We don’t need more money from the working class to transfer to corporates. A vast majority of our population is not corporate. Economy is also a distribution.

    The world over, we see increasing resentment with corporates. We are putting more of our population at the mercy of corporates – that too retail – a kind of business that caters to the consumer, not supplier – which our farmers essentially are.

    I am opposed to FDI as a fund raising mission, because it is a one time opportunity, and our mismanagement of funds is a chronic problem. It is like gifting a fortune to an alcoholic. He will live like a king while it lasts, but lacks both intent and capacity to create a lasting advantage.

    Also opposed to FDI in retail till we have a political leadership that has no qualms squashing down corporates when their demands tread on the feet of citizens. The FDI in retail at present, is largely another wool covering mission to vanish the disaster caused by misgovernance and mismanagement of funds. Our country has seen governments peddling rights of citizens in deals made on their behalf with corporates.

    Not opposed to FDI per se. FDI will definitely mean a massive flow of money into the country. It will mean better quality standards that multi-nationals can brand. When reforms have plugged the decay, FDI can prove to be the engine that makes us a super power.

  2. December 5, 2011 at 8:18 pm

    Maybe BJP has a merchant class base. That still doesn’t explain why other parties DMK, AIADMK, TMC, Left, BJD and even leaders from the Congress oppose it. All of them cannot have a nexus with the merchant class. There must be some other reason.

    Like every decision FDI in retail sector will have pluses and minuses. There will be some employment generation and some displacement. The result, however, would be a net reduction in the number employed in the retail sector. Retail employs the second largest number of our people and acts like a shock absorber. As for reduction of wastage (though that’s not something we cannot do without FDI) that might be likely if the foreign outlets are forced to procure locally which I don’t think is the case. There was some confusion about that but even after the clarification it seems only 30% has to be procured locally. Rest can be sourced from anywhere. Arun Jaitley made a valid point in his article in Economic Times that this step should have followed a number of other reforms that make our manufacturing and retail sectors more competitive. In the present form it’s not likely to be either a catastrophe or panacea as its opponents and proponents try to suggest but has the potential to impact our service sector and manufacturing GDP adversely unless preceded by other reforms.

  3. jon
    December 12, 2011 at 8:30 am

    A lot of debate to the point of boredom. But most tend to be onesided. The combination of you and vidyut provides a holistic argument

  4. July 2, 2012 at 4:56 am

    I am just amazed by the Author. In just about most articles that I have read in the last few months there is a BJP angle to it if not Narendra Modi. Humble suggestion to Author, who otherwise writes well, is to give up obsession with the BJP or it could stunt her intellectual growth.
    Given its current slant I do not deem it worth my time to respond to the actual content written on the subject.

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